Today, the world of logistics has witnessed tremendous growth, and at the center of it all stand two crucial service providers: 3PL and 4PL. With the global 3PL market size reaching 824.4 billion dollars in 2023, the 3PL market is expected to cross one trillion dollars by 2027. Similarly, the market size of 4PL is growing rapidly and was valued at 24.4 billion dollars in 2023. Without any doubt, these service providers are revolutionizing how businesses manage their fulfillment and supply chains, and their impact is undeniable.
In this blog, we are breaking down what 3PL and 4PL are, their operation, benefits, and challenges. We also answer the most important question: 3PL vs 4PL; which one should you choose? Keep reading to know more.
What is a 3PL?
3PL, or third-party logistics, refers to outsourcing logistics and supply chain functions to external service providers. In the 3PL model, businesses outsource various logistics operations, such as transportation, warehousing, distribution, and fulfillment. This outsourcing allows companies to focus on their core competencies while leveraging the expertise and resources of 3PL providers.
How does a 3PL work: Process in a 3PL
The range of services offered by 3PLs can be diverse, with some specializing in basic pick, pack, and ship functions, while others offer additional services, including kitting and returns management. Additionally, the functions of the 3PL can vary based on industry, order volume, and requirements. Here are some of the most common fulfillment functions that 3PLs perform for businesses:
To ship orders to customers, 3PLs must have inventory on hand. So, the first step is warehouse receiving i.e. receiving products from the manufacturer. The 3PL provider then verifies and inspects the incoming goods, updates inventory records, and prepares for the subsequent stages of the supply chain.
3PLs often maintain warehouses where they store and manage inventory efficiently. Warehouse management includes organizing products, optimizing storage space, and implementing inventory control measures.
The core of a 3PL's operations involves fulfilling customer orders promptly and accurately. Order fulfillment encompasses picking products from inventory, packing them securely, labeling them appropriately, and preparing them for shipment.
Shipping and Transportation
3PLs handle the transportation of goods, leveraging their network of carriers to ensure timely and cost-effective deliveries. They manage ecommerce shipping logistics, track shipments in real time, and coordinate with carriers for efficient route planning.
Additional services and customization
Beyond these basic processes, 3PLs often offer supplementary services such as cross-docking, kitting, and warehouse labeling. Most 3PLs also offer added services like returns management and reverse logistics.
What's more, most 3PLs tailor their services to meet each client's specific needs, providing a customized approach to logistics management. This flexibility allows businesses to scale their logistics operations according to demand fluctuations.
What are the benefits of 3PL?
Here are some of the benefits of using a 3PL service provider for your logistical operations:
Access to a wider network
Most 3PL providers typically come with an extensive network of partners, carriers, and distribution centers. This means you gain access to a well-established infrastructure, enabling businesses to expand their reach to newer markets efficiently. Gartner's 2023 Supply Chain Technology Survey report states that 68% of supply chain leaders believe that using a 3PL with a strong global network significantly improves their ability to enter new markets.
Additionally, the wide network facilitates faster and cost-effective transportation of goods and faster delivery time.
Save time and resources
By outsourcing logistics functions to a 3PL, you can redirect your focus and resources to core competencies such as product development, marketing, and customer engagement. With the burden of managing complex logistics processes lifted, businesses can work on improving operational efficiency.
Flexibility and scalability
Another significant advantage of using a 3PL is the flexibility it offers. Using a 3PL, businesses can scale their logistics operations up or down based on seasonal demands or market expansions without the need for significant infrastructure investments.
Some 3PLs offer international shipping, which businesses can take advantage of cross-border trade, benefit from optimized shipping routes, and ensure compliance with international regulations. This expertise is especially valuable for companies expanding their global market presence.
Another major reason businesses choose a 3PL is they enjoy cost savings without compromising service quality. A NTT Data Survey Report states that 64% of 3PL users agree that the use of 3PLs has reduced overall logistics costs. Shared resources and optimized processes contribute to a more cost-effective supply chain, positively impacting the bottom line.
In recent times, to meet the increasing consumer demands and SLAs with businesses, most third-party logistics providers have transitioned to tech-enabled 3PLs. For example, 3PLs have started to invest in advanced Warehouse Management Systems (WMS) and Transportation Management Systems (TMS) to optimize processes and real-time order tracking that gives both businesses and consumers visibility into the state of the order. Businesses can leverage 3PLs state-of-the-art technology for real-time tracking, inventory visibility, and data analytics.
What are the challenges in using 3PL service?
Here are some of the challenges associated with using a third-party logistics provider:
Limited control and visibility
Outsourcing logistics operations to a 3PL is a double-edged sword - it has both pros and cons. By relinquishing direct oversight and control over certain aspects of the fulfillment process, sometimes you will not have 100% visibility over it. And this lack of visibility can pose challenges in monitoring and ensuring the efficiency of the entire process.
Let's accept that not all 3PLs are the same. The standards and practices of a 3PL may not align perfectly with the quality standards of the business. What's worse, partnering with sub-standard 3PLs can affect the quality of your products and, in turn, negatively affect customer satisfaction.
A 3PL study states that a staggering 90% of Fortune 500 companies rely on 3PLs for their logistical functions. This over-dependency on a 3PL for critical aspects of the supply chain introduces dependency risks for any business, irrespective of its scale and size. For example, if the 3PL that you handle your fulfillment operations encounters operational issues or disruptions, it can directly impact your company's ability to fulfill orders and meet customer expectations and in turn, affect your brand and its reputation.
While outsourcing logistics can lead to cost savings in certain areas, there can be hidden or fluctuating costs associated with using a 3PL. Unforeseen charges, such as surges in fuel prices or unexpected demand spikes, can impact the overall cost-effectiveness of the arrangement.
For example, retailers experiencing peak seasons may require additional warehouse space, labor, and transportation capacity from their 3PL provider. This increased demand during certain times of the year can lead to higher costs for these additional services.
What is a 4PL?
A 4PL, or fourth-party logistics, is a type of outsourced supply chain management where a single provider oversees and manages your entire supply chain.
In short, while a 3PL handles specific logistics functions on behalf of a company, a 4PL takes on a broader role as a supply chain management partner.
How does a 4PL work?
A fourth-party logistics (4PL) provider holds various key responsibilities in overseeing the comprehensive management of a supply chain. These responsibilities include:
Managing relationships with 3PL providers
The responsibility of 4PL begins with zeroing in on the 3PL based on expertise, capabilities, and alignment with the client's needs. This involves evaluating geographic coverage, service offerings, technology capabilities, and cost-effectiveness.
Once identified, the 4PL engages in contract negotiation, establishing detailed agreements that define terms, scope of services, performance expectations, and pricing structures for each 3PL. Subsequently, the 4PL continuously monitors 3PL performance through key performance indicators (KPIs), facilitating ongoing improvement and informing strategic decision-making.
Transport management is a crucial aspect of supply chain management that 4PLs take care of. This entails route optimization, where 4PLs leverage technology and data analytics to optimize transportation routes, ensuring efficient and cost-effective movement of goods.
Furthermore, 4PLs also evaluate the most suitable transportation modes for different supply chain segments to make the entire process more efficient and cost-effective.
4PL providers to prevent inventory overstocking and stock forecast demand using advanced analytics and optimizing inventory levels for timely customer fulfillment. Also, 4PLs manage the entire order fulfillment process, from order receipt to delivery, ensuring that inventory is accurately picked, packed, and shipped.
Another important function that 4PLs perform is strategically placing inventory across warehouses, minimizing storage costs. They collaborate with 3PL partners to enhance layouts and implement technology solutions for improved warehouse efficiency.
Provide real-time visibility
Providing real-time visibility into the supply chain is a core function of 4PLs. They use technology to track shipments, monitor inventory levels, and keep clients informed about the status of their supply chain.
What are the benefits of using 4PL services?
From optimizing operation efficiency to access to the latest tech, there are multiple benefits of using a 4PL service. We have listed some of the most important benefits below:
By tapping into established networks, 4PLs can enhance logistical capabilities and ensure streamlined and economically efficient supply chain operations for large businesses with complex supply chain requirements. For example, over the last few years, we have witnessed large enterprises like Nestle, Unilever, and General Motors partnering with leading 4PL providers to achieve this.
Enjoy greater visibility
4PLs provide real-time insights, reducing disruptions and improving responsiveness to market changes. This enhanced visibility fosters better collaboration, enabling quick responses to changes among stakeholders in the supply chain.
Access to advanced technology
Today, most 4PLs leverage state-of-the-art technology, including IoT and data analytics, to optimize supply chain processes for enhanced efficiency. The use of the latest tech enables data-driven decisions, leading to better planning, continuous improvement, and cost-saving opportunities.
What are the challenges in 4PL services?
Using a 4PL for supply chain management has its own share of challenges and disadvantages. Here are some of the most common 4PL challenges:
Dependency on external expertise
Relying on a 4PL provider may reduce control over certain aspects of the supply chain. Businesses may need to trust the expertise and decisions of the 4PL, potentially limiting direct oversight of critical logistics operations.
Not feasible for small- and medium-sized businesses
4PL services are often designed to accommodate larger and more complex supply chains. The comprehensive services offered by 4PLs may be cost-sensitive for smaller businesses with limited budgets. Engaging a 4PL might not align with the financial constraints of smaller enterprises, making it challenging to justify the investment.
3PL vs 4PL - Which logistics model is best for your business
Zeroing between a 3PL and a 4PL is an important decision that businesses must never take lightly. Below, we have mentioned how these logistical models fare in critical business aspects:
Scale and complexity
3PL: They are well-suited for small to medium-sized businesses with straightforward supply chain needs. 3PL providers handle specific logistics functions, such as transportation or warehousing, offering a scalable solution for companies with moderate operational complexity.
4PL: Ideal for larger enterprises with complex, end-to-end supply chain requirements. 4PL providers offer comprehensive management and optimization, accommodating the intricacies of larger-scale operations and diverse logistics functions.
3PL: They are generally more cost-effective for businesses with simpler logistics demands. Companies can select specific services, avoiding the expenses associated with comprehensive end-to-end management.
4PL: While potentially more expensive upfront, 4PLs can provide cost efficiencies through holistic optimization. The comprehensive approach may lead to long-term savings by streamlining operations, negotiating favorable terms, and leveraging advanced technologies.
Long-term growth and scalability
3PL: Suitable for businesses with stable and predictable logistics needs. Some 3PLs may lack the adaptability required for rapid growth or dynamic market changes. Also, frequent renegotiations or service expansions might be necessary as the business evolves.
4PL: They offer scalability and adaptability to accommodate evolving business requirements. The strategic, end-to-end oversight provided by 4PLs aligns well with long-term growth, adapting seamlessly to changes in scale, market conditions, or regulatory environments.
3PL: Provides more direct control over specific logistics functions outsourced to the provider. Businesses retain control over individual components of the supply chain.
4PL: Involves outsourcing more operational control to the provider in exchange for a comprehensive, integrated approach. Although the business gains strategic visibility, it has to sacrifice direct control over specific operational aspects.
In conclusion, the choice between 3PL and 4PL depends on the business's specific needs, scale, and complexity. While 3PLs offer cost-effective solutions for simpler logistics requirements, 4PLs are better suited for larger enterprises with complex, evolving supply chain dynamics. The decision should align with the business's long-term growth plans, technological requirements, and the ability to adapt to a changing business landscape.
Hopstack for 3PLs
Hopstack empowers 3PLs with a holistic 3PL WMS and fulfillment solution. Hopstack simplifies client onboarding, automates 3PL billing, and delivers powerful performance analytics. Looking to enhance scalability, boost productivity, and optimize resource utilization in the dynamic world of fulfillment? Schedule a call with our product specialist today to learn more about Hopstack’s comprehensive features.